The Federal Reserve has a services inflation problem

Pay attention to PCE services

The FOMC meeting is this week. The futures market doesn't expect any rate hike (99% chance of target rate range unchanged). A few days before the event it is exceedingly rare that they are wrong.

That being said, the Federal Reserve still has an inflation problem. 

Specifically it has a services inflation problem. Out of the PCE categories, services are the sector which is cooling down the slowest. That's a problem given that services are such a major part of consumer spending in the US.

But let's unpack what that means.

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The Federal Reserve has a services inflation problem

The takeaway

PCE inflation is the most important metric for the Federal Reserve. And right now it is not coming down. The main culprit: services.

The services category of the PCE index hasn’t entered a cool-down regime. It is as if the mechanism that is driving services prices always higher isn’t experiencing any slowdown despite the Quantitative Tightening playbook the Fed is running. 

Higher wages leading to higher services costs leading to higher wages. 

That and credit card debt is what keeps the US economy chugging along. 

But US consumers are highly leveraged. That means any hickup is likely to put a lot of consumers in trouble. Meaning US consumers are one accident away from pushing the economy over the edge.

But let’s break this down.

Core services are Jay Powell’s nightmare